A rift between lenders and the government-sponsored enterprises over mortgage insurance widened this week with Freddie Mac's announcement that it will shortly offer a reduced-cost insurance option.

The plan came under fire from the Mortgage Bankers Association, which had criticized a similar program announced in January by Fannie Mae.

Donald E. Lange, president of the trade group, sent a letter Monday to Leland C. Brendsel, chairman and chief executive officer of Freddie Mac, voicing opposition to the initiative.

"We are highly disappointed," said another MBA official, Robert M. O'Toole, senior staff vice president for residential finance. The trade group had urged Freddie not to take the step, he said.

Freddie's program is scheduled to start next month; Fannie's began early this month. Lenders and private mortgage insurers see both as incursions on their turf.

The programs will offer lower-cost insurance on low-down-payment loans made on Fannie's and Freddie's automatic systems. The government-sponsored enterprises say the initiatives fit squarely within their mission to broaden homeownership.

The MBA's disagreement is not with offering consumers lower costs, but with the up-front fee to Fannie or Freddie for lower mortgage insurance coverage, Mr. O'Toole said.

"That appears to us to be a function of the primary market and not the secondary market," he said. That fee revenue might otherwise go to lenders and mortgage insurers in the primary market.

Mortgage insurers continue to write insurance for home loans, but they see Fannie's and Freddie's reduced coverage initiatives translating into less business and income.

Some of the largest mortgage insurance companies, including Mortgage Guaranty Insurance Corp. and GE Capital Mortgage Insurance Corp., have responded with their own plans to lower mortgage insurance costs. These would let borrowers add part of the insurance premium into the loan balance without requiring lenders to change their systems.

Fannie's announcement in January sent mortgage insurance stocks tumbling, but on Monday there was little market reaction to Freddie's announcement, which had been expected.

Like Fannie, Freddie said it would offer two options for lowering mortgage insurance costs.

Freddie's first option, "Reduced MI," will lower mortgage insurance for 30-year fixed-rate loans. The other product, "Custom MI," will provide lower levels of mortgage insurance for fixed-rate mortgages of 30, 20, or 15 years in duration, as well as for five- and seven-year balloon loans and adjustable-rate mortgages.

The main difference is the "product expansion at our Custom MI level," said Bob Ryan, vice president for marketing.

Freddie is offering the options on adjustable-rate and balloon loans, he noted. The other difference is that Freddie will not offer an insurance break for nonowner-occupied property, he said.

Fannie Mae is willing to buy mortgage insurance for loans with a 10% down payment on investor-owned property when combined with a higher interest rate.

Freddie Mac's action "creates a competitive situation," said Jon E. Korpela, senior vice president for the secondary market at Banknorth Mortgage Co. in West Brattleboro, Vt. He said this is good news for any players using Freddie's automated underwriting system.

Freddie's Reduced MI option, which carries no additional fee for the borrower, "will make it a little bit less expensive for the consumer potentially," he said.

Freddie said these offerings are part of its effort to reduce the "overall costs of financing" for homes and to increase consumer "buying power."

Both of the mortgage insurance options are available only for lenders using Freddie Mac's automated underwriting system "Loan Prospector." But Mr. Ryan said Freddie also plans to "work independently with our lenders on alternative solutions."

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